The Tax Man Cometh

By: Shannon Scott
Date: 2/1/2008

Most of you have heard the term "tax credit", but did you know how it can decrease your tax burden and put more cash back into your business? Each year large and small companies forfeit millions of dollars because they do not take advantage of the tax credits available to qualifying employers. Many of these credits go unclaimed due to the complexity and time consuming factors that impact the process. There are many types of tax credits available to your company on the Federal, State and local level. For the staffing industry, the federal hiring credits such as the Work Opportunity Tax Credit (WOTC), Empowerment Zone (EZ) and Renewal Community (RC) credits can result in huge dividends. These credits are available by simply doing what you do every day; hiring and placing employees.

These tax credits can provide up to $9,000 per employee in Federal Income Tax Credits based on the category for which the employee qualifies. These credits can be taken in the year earned, carried back one year or carried forward 20 years. The WOTC rewards employers hiring individuals who are members of targeted economic groups while the EZ and RC are zone based credits. To qualify for a zone credit, an employee simply has to live and work in one of the 81 designated zones in the United States.

Most companies believe they are taking advantage of this program through their regular tax deductions, however, that is simply not the case. If your new hires are not completing and signing an IRS Form 8850 upon hire, you are not processing these tax credits. This program, although very beneficial, can be almost impossible to administer in house. Processing and qualifying these credits takes a very good understanding of how tax incentives are applicable to a particular industry, location or employee base. In some cases, extensive background and address history research must take place in order to verify these credits. Tax credit processing companies throughout the United States assist you in identifying these credits and calculating the amount for which an employee qualifies. Most of these companies work on a contingency fee basis, so there is no financial risk to your company and the fees are tax deductible.

Taking a proactive approach in identifying these credits can significantly increase your tax credit yield. The application process will help you screen your new hires and identify their tax credit potential. After all, this program was put in place to encourage you to hire these employees.

Recent tax law changes have increased the use of these credits to businesses who could previously not take advantage of the incentives along with extending the program itself. The WOTC credit was extended for 3.5 years with liberalized rules for hiring disabled veterans and workers in "outward migration counties." Under the pre-2007 Small Business Act law, most general business credits, such as the work opportunity tax, could not offset a taxpayer's Alternative Minimum Tax (AMT) liability. With the enactment of the 2007 Small Business Act, this changed for credits earned after January 1, 2007. The WOTC credits earned after January 1, 2007, will now offset AMT. A taxpayer is subject to AMT whenever their tentative minimum tax exceeds their regular tax.

There are many good resources available for learning more about the types of credits and how these credits can help reduce your tax burden. Information can be found on most search engines along with the IRS Website (www.irs.gov). Tax time is fast approaching and it is not too late to help reduce your 2007 tax liability.

Shannon Scott is the President of TaxBreak. He can be contacted at 888.291.1938 or by email at sscott@taxbreakllc.com.